Jamie Dimon Is Buying JPM, But The Charts Warn You Shouldn't

JPMorgan Chase (NYSE: JPM) Chairman and CEO Jamie Dimon made news last week when it was announced he was personally buying $26 million worth of company stock as prices were hitting two-year lows. As The Wall Street Journal put it, his purchase was intended to "boost confidence in [the] banking industry" and "stem the tide of negative sentiment overwhelming bank stocks this year."

​JPM jumped in after-hours trading on Feb. 11 following the news and hasn't looked back, gaining more than 10% in the past three trading days.

The question is whether Dimon's bold move was enough to turn the tide in the sector or even just in JPM.

The short answer is no.

As we can see on the chart, it's been all downhill for JPMorgan this year, starting with a breakaway gap to the downside on the first trading day of the year. This is a powerful event that signals a stock rapidly changing its condition from uncertain to undeniably bearish.

JPM then fell as much as 18% through last week's low, and even after the three-day rally, it remains solidly below its major moving averages.

Had this rally not occurred, there would be no doubt about the stock's bearish conditions. So in that regard, Mr. Dimon seemed to be successful. But the technicals still do not line up in favor of an extended advance.

For argument's sake, let's start with the positive changes on the chart, including what appears to be an island gap reversal to the upside last week. This is a pattern that suggests the tide washed all the way out and then started to rush back in. It begins with a falling trend and culminates with a gap down into what should be a final low.

The day of the final decline typically leaves a small bar, or candle, as there is no follow through beyond the initial decline. The next day, the reverse occurs and the stock jumps, or gaps, back up. The pattern on the chart resembles an island surrounded by water, hence the name.

When viewed in the weekly time frame, last week's trading left a bullish hammer candle with heavy volume. Although prices are higher this week, I find it difficult to call it the follow through needed to confirm a bullish reversal. Between Tuesday's open and Wednesday's close, there was not much advancement. Of course, that could change by week's end, but for now it seems the fire is fading.

Resistance looks rather powerful in the $59.50 to $60 area, which is just above current trading. The line on the chart was drawn though daily closes, and it was a significant level as far back as early 2014. It also was the floor seen last summer as part of a double-top pattern and the ceiling for the December bounce after that floor was broken.

There is one more factor to consider. On-balance, or cumulative, volume, which keeps a running tab of volume changing hands on up days minus volume on down days, is still falling. As prices bounced, the gains made by the indicator were small in comparison to the decline that preceded it, suggesting nothing more than an oversold bounce sparked by Dimon's actions.

Unless other insiders step up to follow Dimon's lead, it seems the afterglow will soon fade… and so should holders of the stock.

The trend in JPM is still down. Momentum, while better, is still only neutral. The financial sector is still among the poorest performers of the year. And the double-top pattern breakdown on JPM's chart is still in effect with an unrealized downside objective in the $48.50 area.

Traders who get positioned now on the short side stand to make a quick double-digit profit as the bear market bounce fades.

Recommended Trade Setup:

-- Sell JPM short at the market price
-- Set stop-loss at $62.40
-- Set initial price target at $48.50 for a potential 17% gain in five weeks

Note: My colleague Jared Levy just recommended a bearish trade in another big bank, except his doesn't involve shorting. Traders stand to make a 39.3% gain in 60 days, or 239% annualized, risking no more than $675. There's still time to get in. To learn how he's doing it, click here.